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1 February 20, 2015 NOTE TO: Medicare Advantage Organizations, Prescription Drug Plan Sponsors, and Other Interested Parties SUBJECT: Advance Notice of Methodological Changes for Calendar Year (CY) 2016 for Medicare Advantage (MA) Capitation Rates, Part C and Part D Payment Policies and 2016 Call Letter In accordance with section 1853(b)(2) of the Social Security Act, we are notifying you of planned changes in the MA capitation rate methodology and risk adjustment methodology applied under Part C of the Act for CY Also included with this notice are proposed changes in the payment methodology for CY 2016 for Part D benefits and annual adjustments for CY 2016 to the Medicare Part D benefit parameters for the defined standard benefit. For 2016, CMS will announce the MA capitation rates and final payment policies on Monday, April 6, 2015, in accordance with the timetable established in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Attachment I shows the preliminary estimates of the national per capita MA growth percentage and the national Medicare fee-for-service growth percentage, which are key factors in determining the MA capitation rates. Attachment II sets forth changes in the Part C payment methodology for CY Attachment III sets forth the changes in payment methodology for CY 2016 for Part D benefits. Attachment IV presents the annual adjustments for CY 2016 to the Medicare Part D benefit parameters for the defined standard benefit. Attachment V presents the preliminary risk adjustment factors. Attachment VI provides the draft CY 2016 Call Letter for MA organizations; section 1876 costbased contractors; prescription drug plan (PDP) sponsors; demonstrations; Programs of All- Inclusive Care for the Elderly (PACE) organizations; and employer and union-sponsored group plans, including both employer/union-only group health plans (EGWPs) and direct contract plans. The Call Letter contains information these plan sponsor organizations will find useful as they prepare their bids for the new contract year. Comments or questions may be submitted electronically to the following address: Comments may be made public, so submitters should not include any confidential or personal information. In order to receive consideration prior to the April 6, 2015 release of the final Announcement of Calendar Year 2016 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies, comments must be received by 6:00 PM Eastern Standard Time on Friday, March 6, 2015.

5 5 Attachment I. Preliminary Estimates of the National Per Capita Growth Percentage and the National Medicare Fee-for-Service Growth Percentage for Calendar Year 2016 The Affordable Care Act, by amendments to section 1853 of the Social Security Act, establishes a new methodology for calculating each MA county rate as a percentage of Fee for Service (FFS) spending in each respective county. The Affordable Care Act provides for a transitional period during which each county rate is calculated as a blend of the pre-affordable Care Act rate set under section 1853(k)(1) of the Social Security Act (the applicable amount ) and the new FFSbased Affordable Care Act rate set under section 1853(n)(2) of the Social Security Act (the specified amount ). For 2016, most counties will be fully transitioned to the new rate methodology, while others will continue to be based on a blended rate. Section 1853(n)(4) of the Social Security Act requires that the blended benchmark (which is increased by quality bonus payment percentages where applicable) be capped at the level of the 1853(k)(1) applicable amount. The MA county rates are based on two trend factors (the MA Growth Percentage and FFS Growth Percentage). 1 For 2016, the rate established under section 1853(k)(1) is the greater of: 1) the county s 2016 FFS rate or 2) the 2015 applicable amount increased by the CY 2016 national per capita MA growth percentage. For 2016, the specified amount will be based on a percentage of the 2016 FFS rate. The 2016 FFS rate is calculated, in part, using the FFS growth percentage. CMS plans to rebase the county FFS rates for 2016 as part of the calculation of the rates for Throughout this document, the Social Security Act will be referred to as the Act. Section A. MA Growth Percentage The current estimate of the change in the national per capita MA growth percentage for aged and disabled enrollees combined in CY 2016 is 2.68 percent. This estimate reflects an underlying trend change for CY 2016 in per capita cost of 1.14 percent and, as required under section 1853(c)(6)(C) of the Act, adjustments to the estimates for prior years as indicated in the table below. Table I-1 below summarizes the estimates for the change in the national per capita MA growth percentage for aged/disabled beneficiaries. Consistent with the 2015 Final Announcement, the basis for the preliminary MA growth percentage reflects an assumption that Congress will act to 1 The national per capita MA growth percentage is described in section 1853(c)(6)(C) and includes projected expenditures for MA enrollees and FFS enrollees. OACT estimates an MA growth percentage for aged and disabled Medicare beneficiaries, and separately for ESRD beneficiaries. In contrast, the FFS growth percentage reflects projected expenditures for FFS beneficiaries only, also estimated separately for aged and disabled beneficiaries versus ESRD beneficiaries.

6 6 prevent the projected cumulative 21.2 percent reduction in Medicare physician payment rates from occurring in The Office of the Actuary has been directed by the Secretary to use this assumption, on the grounds that it is a more reasonable expectation than the reduction required under the statutory sustainable growth rate formula. Table I-1. National Per Capita MA Growth Percentage for 2016 Prior Increases Current Increases 2003 to to to to 2016 NPCMAGP for 2016 With 1853(c)(6)(C) adjustment 1 Aged+Disabled 43.00% 45.18% 1.14% 46.84% 2.68% 1 Current increases for divided by the prior increases for Section B. FFS Growth Percentage Section 1853(n)(2) of the Act, as amended by the Affordable Care Act requires that the specified amount for a county be calculated as a percentage of the county FFS costs. Table I-2 below provides the current estimate of the change in the Aged/Disabled FFS United States per capita cost (USPCC), which will be used for the county FFS portion of the benchmark. The percentage change in the FFS USPCC is shown as the current projected FFS USPCC for 2016 divided by the prior projected FFS USPCC for Table I-2 also shows the change in the FFS USPCC for dialysis-only ESRD. Statewide dialysisonly ESRD rates are determined by applying a historical average geographic adjustment to a projected FFS dialysis-only ESRD USPCC. We will use a 5-year average of State data to determine the average geographic adjustment, similar to the method used to determine the geographic adjustments for non-esrd rates. Table I-2. Increase in the FFS USPCC Growth Percentage for CY 2016 non-esrd Total USPCC FFS USPCC Current projected 2016 USPCC $ $ Prior projected 2015 USPCC $ $ Percent increase 2.68% 1.47%

8 8 Table I-4 - Comparison of Current & Previous Estimates of the FFS USPCC non-esrd Calendar Year Current Estimate Part A Part B Part A & Part B Last Year s Estimate Current Estimate Last Year s Estimate Current Estimate Last Year s Estimate Ratio 2010 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ These estimates are preliminary and could change when the final rates are announced on April 6, 2015 in the Announcement of CY 2016 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies. Further details on the derivation of the national per capita MA growth percentage and the fee-for-service growth percentage will also be presented in the April 6, 2015 Announcement.

9 9 Attachment II. Changes in the Part C Payment Methodology for CY 2016 Section A. MA Benchmark, Quality Bonus Payments and Rebate As noted in Attachment I, the Affordable Care Act establishes a new methodology for calculating each MA county rate as a percentage of FFS spending in each county. The Affordable Care Act provides for a transitional period during which each county rate is calculated as a blend of the pre-affordable Care Act rate set under section 1853(k)(1) of the Social Security Act (the applicable amount ) and the new FFS-based Affordable Care Act rate set under section 1853(n)(2) of the Social Security Act (the specified amount ). (Please note that throughout this document, the terms benchmark and county rate are used interchangeably, and the term service area benchmark indicates the bidding target for a plan.) Section 1853(c)(1)(D)(ii) of the Act requires CMS to rebase the county FFS rates, which form the basis of the specified amount, periodically, but not less than once every three years. When the rates are rebased, CMS updates its estimate of each county s FFS costs using more current FFS claims information. CMS plans to rebase the county FFS rates for The Program for All Inclusive Care for the Elderly is exempt from the MA blended benchmark provisions, per section 1853(n)(5) of the Act. A1. Applicable Amount The applicable amount is the pre-affordable Care Act rate established under section 1853(k)(1) of the Act. As CMS will rebase the rates in 2016, for 2016, the applicable amount is the greater of: 1) the county s 2016 FFS rate or 2) the 2015 applicable amount increased by the CY 2016 National Per Capita Medicare Advantage Growth Percentage. A2. Specified Amount The specified amount is based upon the following formula. (2016 FFS rate minus IME phase-out amount) (applicable percentage + applicable percentage quality increase) Where: IME phase-out amount is the indirect costs of medical education phase-out amount as specified at section 1853(k)(4); Applicable percentage is a statutory percentage applied to the county s base payment amount, as described at Sec. 1853(n)(2)(B); and

10 10 Applicable percentage quality increase, referred to in this document as the quality bonus payment (QBP) percentage, is a percentage point increase to the applicable percentage for a county in a qualifying plan s service area. Section 1853(n)(2)(C) of the Act requires CMS to determine applicable percentages for a year based on county FFS rate rankings for the most recent year that was a rebasing year. To determine the CY 2016 applicable percentages for counties in the 50 States and the District of Columbia, CMS will rank counties from highest to lowest based upon their 2015 average per capita FFS costs, because 2015 is the most recent FFS rate rebasing year prior to CMS will then place the rates into four quartiles. For the territories, CMS will assign an applicable percentage to each county based on where the county rate falls in the quartiles established for the 50 States and the District of Columbia. CMS is publishing the 2016 applicable percentages by county with the Advance Notice at MedicareAdvtgSpecRateStats/Ratebooks-and-Supporting-Data.html. Each county's applicable percentage is assigned based upon its quartile ranking, as follows: Table II-1. FFS Quartile Assignment Rules under the Affordable Care Act Quartile Applicable Percentage 4 th (highest) 95% 3 rd 100% 2 nd 107.5% 1 st (lowest) 115% Section 1853(n)(2)(D) of the Act provides that, beginning in 2013, if there is a change in a county's quartile ranking for a payment year compared to the county's ranking in the previous year, the applicable percentage for the area for the year shall be the average of: 1) the applicable percentage for the previous year and 2) the applicable percentage for the current year. For both years, CMS will calculate the applicable percentage that would otherwise apply for the area for the year in the absence of this transitional provision. For example, if a county's ranking changed from the second quartile to the third quartile, the applicable percentage would be percent for the year of the change the average of percent and 100 percent. A3. Quality Bonus Payment Percentage The Affordable Care Act provides for CMS to make quality bonus payments to MA organizations that meet quality standards measured under a five-star quality rating system 2. In this document, we refer to this quality bonus as the quality bonus payment (QBP) percentage 2 Star ratings are determined at the contract level; the contract rating is applied to each plan under that contract.

11 11 instead of using the statutory term applicable percentage quality increase. The QBP percentage is a percentage point increase to the applicable percentage for each county in a qualifying plan s service area, before multiplying the percentage by the FFS rate for the year to determine the specified amount. Table II-2 shows the QBP percentage for each Star Rating for 2016 payments. For CY 2016 payments, plans with less than 4 stars will not receive a QBP percentage increase to the county rates, and plans with 4 or more stars will receive a QBP percentage increase to the county rates, as set forth in sections 1853(n) and 1853(o) of the Act. See section A8 for rebate percentages for CY Table II-2 Percentage Add-on to Applicable Percentage for Quality Bonus Payments Star Rating 2016 QBP Percentage* Less than 3 stars 0% 3 stars 0% 3.5 stars 0% 4 stars 5% 4.5 stars 5% 5 stars 5% *The QBP percentage is a percentage point increase to the applicable percentage for a county in a qualifying plan s service area. An MA plan s Star Rating is the rating assigned to its contract. MA plans with a Star Rating of 4 or more stars will bid against their service area benchmarks that include the 5 percentage point QBP add-on to each county rate in the service area. For 2016, MA plans with a Star Rating less than 4 stars will bid against service area benchmarks that do not include QBP add-ons to the county rates, with the exceptions of new MA plans and low enrollment plans. As discussed below, all rates are capped at the Section 1853(k)(1) amount that is, what the benchmark would have been under the pre-aca rules, as per Section 1853(n)(4) of the Act. New MA Plans The method for determining the QBP percentage for a new MA plan is different from the method described above. For the purposes of determining a QBP percentage, at a new MA plan is defined as an MA contract offered by a parent organization that has not had another MA contract in the previous three years. 3 These new MA plans are treated as qualifying plans (meaning eligible to receive a QBP percentage increase to the county rates) except that the QBP percentage will be 3.5 percentage points, per section 1853(o)(3)(A)(iii)(I)(cc) of the Act. That is, 3 All regulatory cites are to Title 42 of the Code of Federal Regulations unless otherwise noted. See also 1853(o)(3)(iii)(II).

12 12 this type of new MA plan will bid against a service area benchmark that reflects a 3.5 percentage point increase to each county rate in the plan s service area. As discussed below, all rates are capped at the Section 1853(k)(1) amount that is, what the benchmark would have been under the pre-aca rules, as per Section 1853(n)(4) of the Act. Note that for a parent organization that has had a contract with CMS in the previous three years, any new MA contract under that parent organization will receive an enrollment-weighted average of the Star Ratings earned by the parent organization s existing MA contracts. Such plans may qualify for a QBP increase based on the enrollment-weighted average rating. CMS finalized this policy in the 2012 Announcement (page 2), found on the CMS website at Documents.html. Low Enrollment Plans Sec. 1853(o)(3)(A)(ii)(II) of the Act, as implemented at (d)(7)(iv)(B), provides that for 2013 and subsequent years, CMS shall develop a method for determining whether an MA plan with low enrollment is a qualifying plan for purposes of receiving an increase in payment under section 1853(o). We apply this determination at a contract level, and thus determine whether a contract (meaning all plans under that contract) is a qualifying contract. Pursuant to , a low enrollment contract is one that could not undertake Healthcare Effectiveness Data and Information Set (HEDIS) and Health Outcome Survey (HOS) data collections because of a lack of a sufficient number of enrollees to reliably measure the performance of the health plan. Note that the standards for statistical reliability of performance measures, including HEDIS and HOS, are addressed in the Call Letter discussion of Star Ratings. While section 1853(o)(3)(A)(ii) requires that low enrollment plans not able to have a quality rating due to insufficient data be treated as qualifying plans entitled to an increase in payment under section 1853(o), it does not address the amount of this required increase. As in 2015, for 2016 payments, we propose to treat low enrollment contracts that meet the standard to be qualifying contracts, which means they will receive the QBP percentage of 3.5 percentage points that is paid with respect to new MA plans. We interpret 1853(o)(3) as establishing two types of qualifying plans for purposes of applying the QBP; with the amount of the QBP determined by the basis for treatment of the plan as a qualifying plan (i.e., whether the amount is based on the score produced under the star rating system or based on the default increase specified in the case of new MA plans). Because the rationale for treating new MA plans as qualifying plans is the same as doing so in the case of low enrollment plans (i.e., there is no basis for assigning a star value), we believe that new MA plans and low enrollment MA plans should receive the same treatment for the purpose of establishing the amount of quality bonus payments. This is consistent with our treatment of low enrollment contracts for purposes of determining the rebate available to the plan, and with our treatment of low enrollment plans for CY2015.

13 13 A4. Qualifying County Bonus Payment Beginning with payment year 2012, section 1853(o)(2) of the Act extends a double QBP percentage to a qualifying plan located in a qualifying county. Section 1853(o)(3)(B) of the Act defines a qualifying county as a county that meets the following three criteria: 1) has an MA capitation rate that, in 2004, was based on the amount specified in section 1853(c)(1)(B) for a Metropolitan Statistical Area with a population of more than 250,000; 2) as of December 2009, had at least 25 percent of MA-eligible beneficiaries residing in the county enrolled in a MA plan; and 3) has per capita FFS county spending for 2016 that is less than the national monthly per capita cost for FFS for For example, a plan with a rating of 4.5 stars will have 5 QBP percentage points added to the applicable percentage of each county in its service area. For a qualifying county in that plan's service area, an additional 5 percentage points would be added to that county's applicable percentage for a total increase of 10 percentage points. If this qualifying county otherwise has an applicable percentage of 95 percent, this is increased to 105 percent to reflect the quality bonus payment percentage for that county. As discussed below, all rates are capped at the Section 1853(k)(1) amount that is, what the benchmark would have been under the pre-aca rules, as per Section 1853(n)(4) of the Act. CMS will publish a complete list of qualifying counties in the final 2016 Announcement. The listing will contain all counties that meet all three criteria stated above. Two of the three elements for determining a qualifying county (2004 urban floors (Y/N for each county) and 2009 Medicare Advantage penetration rates can be found in the 2015 Rate Calculation Data file (columns W and X) on the CMS website at MedicareAdvtgSpecRateStats/Ratebooks-and-Supporting-Data.html. The 2016 FFS rates, which are necessary for the third criterion, are not available at the time this Advance Notice is published. The FFS rates and the national average FFS spending amount will be published in the final 2016 Announcement. A5. Affordable Care Act County Rates Transitional Phase-In The blend of the specified amount and applicable amount used to create the county rates, as discussed above, is being phased in on a transitional basis. This transition began in 2012 and will be completed by In 2012, each county was assigned to one of three transition periods - two, four, or six years. CMS determined a county s specific transition period by calculating the difference between the county s Projected 2010 benchmark amount and 2010 applicable amount. The county transition period assigned is based on the size of the difference between these two amounts, with six year counties having the largest differential (at least $50). The projected 2010

14 14 benchmark amount was a one-time only calculation, which has been employed solely for the purpose of assigning each county its appropriate transition period, in accordance with the Affordable Care Act. The transition periods for each county (2, 4, or 6 years) were published with the 2012 Advance Notice and can be found at the CMS website at MedicareAdvtgSpecRateStats/Announcements-and-Documents.html. A6. Blended Benchmark Calculations. Section 1853(n)(1) and (3) of the Act sets forth the rules for calculating the blended benchmark, depending on the assigned transition period. Year Table II-3. Blended Benchmark Calculations Two Year County Blend Four Year County Blend Six Year County Blend Pre-ACA ACA Pre-ACA ACA Pre-ACA ACA /2 1/2 3/4 1/4 5/6 1/ % 1/2 1/2 2/3 1/ % 1/4 3/4 1/2 1/ % 0 100% 1/3 2/ % 0 100% 1/6 5/ % 0 100% 0 100% A7. Cap on Blended Benchmarks. Section 1853(n)(4) of the Act requires that the blended benchmark for a county must be capped at the level of the county s applicable amount at section 1853(k)(1) of the Act. This provision specifies that the QBP increase must be included in the blended benchmark before the comparison is made to determine if the cap is required. Thus, for all counties, rates are capped at the section 1853(k)(1) amount that is, what the benchmark would have been under the pre- ACA rules. A8. Rebate Under section 1854(b)(1)(C) of the Act, except for MSA plans, the level of rebate is tied to the plan's Star Rating. Rebates are calculated, for each plan, as a percentage of the difference between the risk-adjusted service area benchmark and the risk-adjusted bid. Plans use rebates to fund supplemental benefits and/or to buy down beneficiary premiums. Section 1854(b)(1)(C) stipulates rebate percentages that apply based on a plan s Star Rating, as shown in Table II-4.

15 15 Table II-4. MA Rebate Percentages Star Rating Stars 70% 3.5 to < 4.5 stars 65% < 3.5 stars 50% Section 1854(b)(1)(C)(vi)(II) of the Act requires that a new MA contract under a new parent organization will be treated as having a Star Rating of 3.5 stars for 2012 and subsequent years, for purposes of determining the rebate percentage. The statute is silent on the rebate percentage to assign to low enrollment plans in years after As we did for 2015, CMS is proposing to use its discretion and treat low enrollment plans as having a Star Rating of 3.5 stars for purposes of determining the rebate percentage for Section B. Calculation of Fee for Service Rates The FFS rate for each county is a product of 1) the national FFS cost, or United States per-capita cost (USPCC), and 2) a county-level geographic index called the average geographic adjustment (AGA). In the 2015 Announcement, we announced updates and refinements to the AGA calculation methodology to reflect changes in FFS payment rules. Historical claims data were repriced to reflect the most current wage and cost indices. CMS re-priced hospital inpatient, hospital outpatient, skilled nursing facility, and home health claims to reflect the most current wage indices, and re-tabulated physician claims with the most current Geographic Practice Cost Index. Also in 2015, we repriced historical claims to account for the changes made by the ACA to payments to disproportionate share hospitals. We also repriced durable medical equipment claims to account for the change in prices associated with the competitive bidding program. For 2016, we are proposing to update the claims data used to calculate the AGAs, and to continue the repricing of historical data in the AGA calculation. Repricing historical claims, in conjunction with rebasing rates for 2016, ensures that the 2016 FFS county rates reflect the most current FFS fee schedules and payment rules. B1. AGA Methodology for 2016 In the first step, CMS is proposing to add the 2013 cost and enrollment data, and drop the 2008 cost and enrollment data, to the historical claims experience used to develop new geographic cost indices for each county. As a result, the five year rolling average will be based on claims data from

16 16 In the second step, CMS will exclude hospice expenditures and FFS claims paid on behalf of cost plan enrollees from the 2013 claims. Comparable adjustments were previously made to claims data. For Puerto Rico, CMS will only include claims and enrollment for beneficiaries with Part A eligibility and Part B enrollment for all five years (2009 to 2013). In the third step, CMS will re-price the historical inpatient, hospital outpatient, skilled nursing facility, and home health claims from to reflect the most current (i.e., FY 2015) wage indices, and re-tabulate physician claims with the most current (i.e., CY 2015) Geographic Practice Cost Index. For 2016, CMS will also continue to adjust historical FFS claims to account for Section 3133 of the Affordable Care Act (ACA), which replaced 75 percent of hospital Medicare Disproportional Share Hospital (DSH) Payments with uncompensated care payments (UCP) beginning on October 1, Consistent with the methodology implemented for 2015, CMS would adjust claims for each DSH hospital to reflect the reduction in DSH payments and the allocation of the UCP by incorporating the corresponding requirements of the final FY 2015 Inpatient Prospective Payment System (IPPS) rule (79 FR 50014). Also for 2016, we will continue re-pricing Durable Medical Equipment (DME) claims from to reflect the most current DME prices associated with the competitive bid program, and will continue using the Round 1 Recompete and Round 2 prices in making these adjustments. As in prior years, CMS will, (1) make additional adjustments to the FFS rates for those items detailed in this Section below, and (2) the average of the five year geographic indices, based on the adjusted claims data, will be divided by the county s average five-year risk score from the 2016 risk model in order to develop the AGA for that county. Additional Adjustments As in prior years, CMS will also make additional adjustments to the FFS rates for certain items. These adjustments are made after the AGA is calculated: Direct Graduate Medical Education: removed from FFS county rates (section 1853(c)(1)(D)(i) of the Act) Exclusions for Electronic Health Record incentives for doctors and hospitals (section 1853(c)(1)(D)(i) of the Act) Indirect Medical Education: removed from FFS county rates, as per phase-out schedule in MIPPA (section 1853(k)(4) of the Act) Credibility: for counties with less than 1,000 members, blend county experience with that of others in the market area VA-DOD: apply a cost ratio (an increase to claim costs) to counties with significant Tricare enrollment in the Uniformed Services Family Health Plan (section 1853(c)(1)(D)(iii) of the Act).

17 17 B2. Adjustment to FFS per Capita Costs for VA-DoD Costs Since CY 2012, a VA-DoD adjustment has been applied based on analysis using FFS data from calendar years This analysis was performed separately for all DoD and USFHP-only enrollees to compare the average FFS costs to determine if there were significant differences between the DoD groups and the total Medicare population. To approximate an adjustment to the county fee for service (FFS) payment rates, we analyzed the cost impact of removing the dualeligibles from the Medicare claims and enrollment. For this analysis, dual-eligibles were defined as those Medicare beneficiaries who are also eligible to receive care through the Department of Defense. We calculated the ratio of standardized per capita costs of all Medicare beneficiaries excluding dual-eligibles (DoD) to all Medicare beneficiaries (or all beneficiaries) for each county. For CY 2012, we analyzed the ratios in counties with at least 10 members in the respective groups and found that there was no statistical significance of the DoD ratios, but did find that the Uniformed Services Family Health Plan (USFHP)-only ratios were significant. Accordingly, adjustments were made to counties with at least 10 USFHP members and CMS then adjusted the FFS rates by the ratios calculated. For CY 2016, we are proposing to update the VA-DoD adjustment using the same methodology first implemented in CY 2012, based on an analysis of more recent Medicare claims for DoD dual enrollees for calendar years CMS will adjust the FFS rates by the ratios calculated. Based on applying the adjustments to the 2016 FFS rates, the average FFS rate will change in 179 affected counties by an average of $1.16, with a range of a decrease of $0.08 to an increase of $20.74; 165 counties will experience increases in FFS rates of $0.01 or more. Section C. IME Phase Out Section 161 of the Medicare Improvements for Patients and Providers Act of 2008 amended section 1853(k)(4) of the Act to require CMS to phase out indirect medical education (IME) amounts from MA capitation rates. Pursuant to section 1894(d)(3) of the Act, PACE programs are excluded from the IME payment phase-out. Payment to teaching facilities for indirect medical education expenses for MA plan enrollees will continue to be made under fee-forservice Medicare. For purposes of making this adjustment for 2016, we will first calculate the 2016 FFS rates including the IME amount. This initial amount will serve as the basis for calculating the IME reduction that we will carve out of the 2016 rates. The absolute effect of the IME phase-out on each county will be determined by the amount of IME included in the initial FFS rate. Under section 1853(k)(4)(B)(ii), the maximum reduction for any specific county in 2016 is 4.2 percent of the FFS rate. To help plans identify the impact, CMS will separately identify the amount of IME for each county rate in the 2016 ratebook. We will also publish the rates with and without the IME reduction for the year.

18 18 Section D. ESRD Rates In developing the 2016 ESRD Medicare Advantage rates, we obtain the FFS dialysis reimbursement and enrollment data by each state for the years For each year, we compute the per capita costs by state. The geographic indices for each year are calculated by dividing the state per capita cost by the total per capita cost of the nation. The average geographic adjustment (AGA) by state is then determined by calculating a 5-year weighted average of the geographic indices, which is standardized by dividing by the 5-year average risk scores. We calculated the 2013 FFS ESRD dialysis United States per capita cost (USPCC) based on the 2013 data above, and using trend factors, develop the prospective 2016 FFS ESRD dialysis USPCC. The 2016 ESRD dialysis rates by state are determined by multiplying the 2016 FFS ESRD dialysis USPCC by the state AGA. The 2016 ESRD dialysis rate is adjusted by removing the direct graduate medical education (GME) expenses and gradually removing the indirect medical education (IME) expenses. Section E. Clinical Trials In 2016, we will continue the policy of paying on a fee-for-service basis for qualified clinical trial items and services provided to MA plan members that are covered under the relevant National Coverage Determinations on clinical trials. Section F. Location of Network Areas for PFFS Plans in Plan Year 2017 Section 1852(d) of the Act requires MA organizations offering certain non-employer MA PFFS plans in network areas to enter into signed contracts with a sufficient number of providers to meet the access standards applicable to coordinated care plans. Specifically, non-employer MA PFFS plans that are offered in a network area (as defined in section 1852(d)(5)(B) of the Act) must meet the access standards described in section 1852(d)(4)(B) of the Act through signed contracts with providers. These PFFS plans may not meet access standards by establishing payment rates that are not less than the rates that apply under Original Medicare and having providers deemed to be contracted as described in (f). Network area is defined in section 1852(d)(5)(B) of the Act, for a given plan year, as an area that the Secretary identifies (in the announcement of the risk and other factors to be used in adjusting MA capitation rates for each MA payment area for the previous plan year) as having at least 2 network-based plans (as defined in section 1852(d)(5)(C) of the Act) with enrollment as of the first day of the year in which the announcement is made. We will include a list of network areas for plan year 2017 in the final Announcement of Calendar Year (CY) 2016 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies. We will also include the list on the CMS website at PrivateFeeforServicePlans/NetworkRequirements.html. We will use January 1, 2015 enrollment data to identify the location of network areas for plan year 2017.

19 19 Section G. CMS-HCC Risk Adjustment Model for CY 2016 We introduced an updated, clinically revised CMS-HCC model for payment year As discussed in the 2014 Advance Notice and Final Announcement, the updated model included both recalibrating the model on more current data and incorporating the clinical update. This updated model resulted in more appropriate relative weights for the HCCs found in the model because they reflect more recent coding and expenditure patterns in FFS Medicare, as well as newly constructed hierarchical condition categories (HCCs) that were possible as a result of ICD-9 codes introduced since the creation of the original CMS-HCC model. For payment years 2014 and 2015, risk scores used in Part C payment were a blend of the risk scores from this clinically-revised model and the 2013 model. For payment year 2016, we propose to transition entirely to using risk scores calculated from the community, institutional, new enrollee, and C-SNP new enrollee segments of the clinicallyrevised CMS-HCC model in Part C payment for aged/disabled beneficiaries. We will continue to use the same risk adjustment model for PACE payments that we have used from 2012 through This model is described in the 2012 Final Announcement in Tables 9 through 11 Announcements-and-Documents.html. Section H. Medicare Advantage Coding Pattern Adjustment For 2016, CMS proposes to update the MA coding adjustment factor to the statutory minimum of 5.41 percent. Given the range of possible methods for calculating the MA coding differences factor, we do recognize that there may be alternative methods that appear to be more accurate. We discuss below another approach to determining this factor, and are asking for comment regarding this methodology. Below we offer three analyses that strongly suggest that the health status of MA enrollees is no worse, and more likely is better, than the health status of FFS beneficiaries of similar age, gender, Medicaid, and institutional status. These include analyses of self-reported health status and mortality rates, 4 as well as Part D drug information. Self-Reported Health Status. Analysis of self-reported data on health status and on whether the respondent has ever been diagnosed with one of a variety of conditions from the Medicare Current Beneficiary Survey (MCBS) suggests that the average risk for MA enrollees is approximately 96% of the average risk for FFS beneficiaries. 4 R Kronick and WP Welch, Measuring Coding Intensity in the Medicare Advantage Program, Medicare & Medicaid Research Review, June

20 20 Mortality Rates. Mortality rates for MA beneficiaries are significantly lower than mortality rates for FFS enrollees. For example, in 2012, the mortality rate in MA was 81% of the mortality rate in FFS. (It is possible that lower mortality rates result from better quality of care in MA, but it seems more likely, given the size of the difference, that this reflects, at least in part, relative health status.) Part D Drug Information. MA enrollees are significantly less likely than FFS beneficiaries to be prescribed drugs that are predictive of high expenditures. HHS has used information from Part D data to construct risk scores for MA and FFS enrollees, and has found that MA enrollees are at significantly lower risk than demographically similar FFS beneficiaries. The first step in the HHS analysis of Part D data used information on FFS beneficiaries who were enrolled in Part D in HHS used the Rx-Defined Morbidity Groups (or Rx-MGs ) of the Johns Hopkins Adjusted Clinical Groups System (ACG) to classify Part D drugs. The result of applying the ACG pharmaceutical grouper to Part D data is a series of 0-1 indicator variables for drug classes, where the variable has a value of 1 if the beneficiary filled a prescription for one of the drugs included in that class, and a 0 otherwise. The second step was to estimate the parameters of a prospective multivariate regression, in which the dependent variable was the sum of 2012 Part A and Part B expenditures for the subset of FFS beneficiaries in the first step who remained in FFS in The regression included 0-1 indicator variables for each of the drug classes, as well as demographic variables for age, gender, Medicaid status, and institutional status. The third step used the parameter estimates from the regression to compute a pharmacy-based risk score for each MA and FFS beneficiary enrolled in Part D. (This risk score, it should be clear, is quite different from the risk score used in adjusting payments to Part D plans. The risk score used for Part D plans uses diagnostic information to predict Part D spending. The risk score we computed in this analysis uses prescription drug information to predict Part A and Part B spending.) Based on this analysis, we found that the average pharmacy-based risk score for MA enrollees was significantly lower than the average pharmacy-based risk score for FFS beneficiaries. Of the three sources of information that are independent of the diagnoses reported by MA plans, each suggests that MA enrollees are at similar or lower risk than demographically similar FFS beneficiaries. We are aware of no independent data source that suggests that MA enrollees are at greater risk than demographically similar FFS beneficiaries. Alternate Methodology for Coding Pattern Adjustment. Given the likelihood that MA enrollees are, on average, at similar (or better) risk than demographically similar FFS beneficiaries, we are considering an alternative approach to calculating the coding pattern adjustment for 2017 or future years. Under this approach, the MA coding pattern adjustment would be calibrated to produce the result that payments to MA plans, in the aggregate, would be no greater than the

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